TPS Trade Alert – June 18, 2013
June 18, 2013
Recommendation:
Buy Metalico (AMEX: MEA) up to $1.65 per share.
Trade Rationale:
Micro cap stocks can often be hit the hardest by negative industry sentiment. In other words, if investors don’t like a certain industry or sector, they tend to take it out on the smallest stocks first.
Don’t get me wrong – sometimes the pessimism is justified. But in many cases, small companies are punished more than necessary.
Take basic materials for example, particularly anything related to industrial metals. Construction and industrial metals and materials have been out of favor among investors for some time now.
Much of it is due to the economy. Although, the long running selloff in commodities isn’t helping either.
Still, it doesn’t mean there aren’t opportunities in industrial metal stocks. Not to mention, micro cap companies typically fly below the radar of most investors anyways.
That’s why we believe Metalico (AMEX: MEA) could be a real find.
MEA engages in ferrous and non-ferrous scrap metal recycling, platinum group metals recycling, and lead metal product fabrication. Basically, the company recycles four different groups of scrap metals and resells them to be used in new manufactured products.
Scrap steel and iron (ferrous metals) are recycled and primarily sold to domestic mills and foundries. Aluminum, copper, lead, and nickel (non-ferrous metals) are recycled and sold to domestic manufacturers and export markets.
The company also buys catalytic converters in order to recycle the platinum group metals inside. These metals are refined and sold to be reused in emission control devices. MEA also recycles rare earth metals which are used in specialty steels, electronics, and high tech products.
In addition, Metalico is the leading fabricator of non-battery lead products. These lead-based products are used for commercial, industrial, and radiation shielding applications.
As you can see, for a small company, MEA is involved with a broad spectrum of products and industries. It’s unusual to see so much diversity in business operations for a company this small.
More importantly, the diversity is good news for shareholders. With MEA, investors are able buy into several different products and business operations for a very cheap price.
And that’s not all…
With exposure to so many different industrial metals, MEA is in great position to thrive off an economic rebound.
The company is already seeing an improvement in the ferrous metal market. Plus, the automobile industry (catalytic converters) and the lead fabrication business remain relatively robust.
As the economy continues to grow, non-ferrous metals will certainly see a jump in demand, along with the company’s other already strong businesses. In other words, we could see MEA’s revenues and earnings ramp up in a hurry.
Speaking of revenues and earnings, the company’s been struggling somewhat in a down period for the industry. But, there are still plenty of positives.
Revenues dropped 16% year over year to $138 million in the most recent quarter. However, they climbed 7% sequentially from the previous quarter.
Moreover, net loss came in at $1.2 million, which improves upon the $2.2 million loss a year ago and the $2.8 million loss last quarter. Even better, EBITDA increased sequentially from $3.5 million to $5.5 million.
Regarding the balance sheet, the company has $4.6 million in cash compared to $125 million in debt. And, current assets are 2.2x current liabilities. All in all, it’s a reasonably healthy balance sheet for this industry.
What’s more, the company has robust operating cash flow (over $32 million per year). As such, debt servicing and working capital are well covered. The company could even use their robust cash flow for acquisitions.
Here’s the best part…
Despite a strong, diversified business model and robust cash flow, MEA is trading at dirt cheap prices.
As of this writing, the stock’s trading for just 0.38x book value and 0.12x sales. Those are freakishly low numbers for a company projected to be profitable by next year.
And it’s especially ridiculous when you consider analysts expect the company to grow profits by 550% next year and 10% per year for the next five years.
Let’s grab shares of MEA now. The stock is dirt cheap because the industry is struggling. But, the company has strong cash flow, a good business model, and a bright future.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
| Company: | Metalico |
| Ticker: | MEA |
| Recent Price: | $1.43 |
| Market Cap: | $68.3 million |
| Avg. Daily Volume: | 263,794 shares |
Chart:
Category: TPS Trade Alert
